Getting a loan with someone else increases your chances of getting approved but also requires you to take on new and long-term financial obligations.
Cosigner vs. co-borrower can be the right decision whether you are helping out a family member or buying something together with a friend. The goal is to understand who is taking home the money and paying back the loan if they can't keep up.
Both of the above options involve co-financing, but they are used for different reasons. A cosigner usually helps the main applicant to qualify for a loan, whereas co-borrowers co-borrow in a borrowing agreement. The contractual rights and obligations of each are defined by the lender and possibly ownership documents.
Feature | Cosigner | Co-Borrower |
Main role | Supports another applicant's loan | Borrows alongside another applicant |
Repayment responsibility | May be required to repay if the borrower defaults | Shares legal responsibility for repayment |
Access to funds | Usually does not receive or control the funds | May share access to the funds |
Ownership rights | Not automatically granted | May have ownership rights, depending on the arrangement |
Credit impact | The loan may affect the cosigner's credit | The loan may affect both borrowers' credit |
Common example | Parent supporting a child's car loan | Partners applying jointly for a mortgage |
The primary distinction of cosigner vs co-borrower isn't necessarily who signed the monthly check; however, it's who the bank considers to be legally accountable. Even a party who has little to do with the loan may still get hit with the risks if the account falls behind.
The credit impact of cosigning a loan can begin as soon as the account is reported to the credit bureaus. Picture a recent graduate with a stable job but no extensive credit history. When a potential auto loan borrower applies for a loan, the lender might refuse it because there isn't enough track record of a person's borrowing and repayment history. So, a parent co-signs to help solidify the loan.
But the cosigner's obligation on a loan isn't limited to just cosigning on the loan. The cosigner may be required to pay the loan instalments, the debt, the interest rate, as well as any fees when the primary borrower defaults. Even if the cosigner never draws on the money, they may be responsible for repayment of the loan per the terms of the agreement and state law.
Before you agree to co-sign the loan, ask yourself one simple question – could you make those payments if the borrower lost their job or stopped paying altogether? If not, then co-signing may leave you with a financial obligation that you can't handle.
A co-borrower arrangement is a good fit for those who want to borrow with a partner. If two people buy a house together, for instance, they might apply together so that the lender can review each of their credit, income and debt histories. Aggregating their income may increase their chances of qualifying, but to what extent varies by individual.
Co-borrower Rights and Obligations: Co-borrowers have obligations along with the primary borrower. The co-borrower paves the way for an individual to qualify for a loan but also in repayment of the loan. If one person is not making the payments as agreed, the co-borrower may still be responsible for the payments.
Ownership is another story. Being listed as a co-borrower on your home loan may mean the same in the title of the property, but not necessarily. Prior to applying for a loan, determine who will be contributing to payments, how you'll split costs, and what one person wants to sell the property/terminate the partnership.
The terms "cosigner" vs “joint applicant” may be used differently by individual lenders. A joint applicant often means that they apply with another applicant (perhaps on a debt or credit application, etc.), whereas a cosigner is there to help the applicant and agree to pay back the debt per the terms.
Questions to ask your lender before you sign:
Written answers may help to clarify what can often be a confusing picture, particularly with relatives or partners, of how the loan is to be used.
The impact of the loan on credit can occur immediately after the account is reported to the credit bureaus. Some lenders report accounts to the credit bureaus immediately; others wait until the end of the month or report only to certain credit bureaus. The account may be listed on the co-signer's credit report, as well as impact the co-signer's credit history, debt-to-income ratio, and loan qualification prospects.
Failure to make a payment might negatively impact the co-signer's credit. When the co-borrower is the one responsible for making each and every payment, the co-signer can be negatively impacted as well because the account is a joint account. Even regular payments may not necessarily protect against defaults in the future.
When you apply for a mortgage down the line, a lender could factor in a co-signed auto loan even if you've never actually made a payment on it. Weigh how the added debt might impact your ability to buy a house, replace a vehicle or get another loan before assuming either responsibility.
Typically, a cosigner cannot remove himself or herself from the loan unless the lender agrees to it. The cosigner cannot let the lender know that he or she would like to quit and then claim that the debt has been paid.
The three options that you need to discuss with your lender are:
If you are thinking of removing a cosigner from a loan, get confirmation in writing that the lender has removed the cosigner, or that the full amount of the original loan has been paid. Never assume that the personal agreement between the primary borrower and cosigner can change the rights of the lender.
Explore This Topic: How Loan Default Status Impacts Your Future Plans
Deciding between a cosigner and co-borrower is just one factor to consider before applying for a loan. A cosigner helps with the approval process, but they could be on the hook if the borrower defaults on the debt.
The co-borrower gets the loan with the primary borrower from the beginning, which can have implications for credit and flexibility.
May be, if the cosigner is at least the minimum age required by the lender and has legal capacity, credit, and other qualifications. The age rules vary by type of loan and by the individual lender.
Some lenders will look at the cosigner's income and liabilities to determine the ability to repay the loan, if they have to. Typical income verification could include pay stubs, tax information, and/or other financial documentation.
Yes. Having a high credit score does not necessarily mean you'll be approved. Lenders also look at factors like income, existing debt, job stability, credit history and more to determine if a person qualifies to cosign.
The primary borrower filing for bankruptcy can impact the cosigner's obligation to pay, but it does not automatically cancel it. It hinges on the debt, the bankruptcy, the contract and the law. Anyone in that position should consult a lawyer.
Yes. A private agreement may decide that payments will be made by you, cover late payments and make a link between both of you for when payments can't be made. However, this agreement does not release the cosigner from the agreement with the lender.
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